A simple tool that may be used to optimize the inventory is to measure inventory efficiency
Inventory efficiency can be defined as % contribution of a product or a sub cat to sales divided by % contribution to the stock of that category.
Inventory efficiency of 1 suggests that the product in question contributes equally to the sales as well the stock so it may be continued
Similarly an inventory efficiency of 0.5 tells that the product is not doing well and may need to be discontinued or reduced in buying value.
An important observation is that an efficiency of greater than 1 for Ex. Inventory efficiency of 3.5 may suggest widespread stock outs and the fact that the product is not getting replenished as frequently resulting in lost sales
After classifying items into ABC following actions may be initiated :
Increase buying of class A items and increase investment in Inventory of these products
Reduce or eliminate items which are C class items as these products probably do not meet the value expectations or taste of the consumer
Inventory optimization is a continuous process and the items may keep falling in ABC or categories as the market evolves, new competition emerges and the business lifecycle of the retailer attains maturity.